The Economist on Irish Public Finances Post author By Philip Lane Post date September 9, 2010 You can read it here, with the usual striking photo. Categories In Banking Crisis, Fiscal Policy Tags The Economist on Ireland 12 Comments on The Economist on Irish Public Finances ← Electric vehicles → Goldman Sachs on Ireland 12 replies on “The Economist on Irish Public Finances” According to that, our debt to GDP ratio, now, in 2010, is already in excess of 100% of GDP. Countries that go above 90% experience serious consequences for future growth. Doesn’t the IMF reckon we can handle 160% though. @Celtic Phoenox I doubt it If I recall corectly, the Economist thought oil was a sell @ $8 per barrel and the Credit Crunch had ended in August 2008. . “FINANCE Minister Brian Lenihan said yesterday he believed Ireland was being “punished” by the international markets for coming clean about the problems in the banking system.” . http://www.independent.ie/national-news/hanging-out-dirty-linen-is-costing-us-lenihan-2332718.html . As Frank Carson used to say “It’s the way I tell ’em!” Sadly, the Economist seems to have been reasonable for once. Constantin has also hazarded an estimate. I think they are both optimistic, as the impact of a depression has not been reckoned. The future will be harsh and is unavoidable. Slo-mo car crash? One has to put up with a bit of Paddywhackery from English-based publications. It has long history and I tend to grin and bear it. And they’re probably entitled to a bit of temporary schadenfreude until the reality of their own unbalanced economy hits home. In any event, The Economist has put some numbers out there for consideration. The big questions, which I suspect are roiling the sovereign bond market, are the ultimate size of the bank recaps (for those who might be solvent), the stock of NAMA bonds and Promissory Notes that will finally be issued, what proportion of these will need to be redeemed in hard government cash and over what timescale the ECB will unwind its support facility and require the Government to produce hard cash to compensate for this unwinding. It seems that the ECB will seek to kick this can down the road as far as possible, but it leaves a huge mountain debt bearing down on the economy. I suspect that, while Ireland continues to take its fiscal medicine, the institutional EU will be as inventive as possible in providing support, but it requires a suspension of disbelief and judgement that is quintessentially Irish. It seems there has been a reverse takeover with the institutional EU also subscribing to this suspension of disbelief and judgement. I think it shows how bad things really are when no one, anywhere, wants to face up to the reality. This is fundamentally an EU/EZ problem, but it appears that the intention is to weigh down the Irish economy for a decade so as to avoid tackling it. Unfortunately the sovereign bond market has a long history of being savagely intolerant of any attempt to suspend disbelief. Again, the standard criticism. Measuring flows of borrowing and stock of debt normalised to GDP. In Ireland GDP is not particularly sufficiently close to measures of income. And it ain’t output that we tax. Do we have an alternative to the present “suspension of pain ” approach courtesy of the smoke and mirror off-balance sheet funding from the EU/ECB? We can now see that this approach will result in a huge interest and debt repayment burden for the next 10-20 years. A realistic alternative is a substantial default by the Irish Banks and Irish State. Why can we not address the pros and cons to the Irish people of the alternative approach. It seems to me in terms of the overall long-term wellbeing of the majority of the Irish population we would be better off by at least forcing the insolvent banks to negoiate terms with their lenders (bonds and interbank loans) and only honour the guarantee on retail deposits. In terms of the government non-bank deficit we either default immediately or call in the EU/IMF to run the economy to push through massive cuts in public spending as well as tax increases. Has anybody taken a look at countries like Iceland and Argentina to see what the impact of default is for the majority of citizens? My impression is that the average citizen is worse off in nominal terms but that the economy continues to function without massive unemployment or economic collapse. I have recently heard quite a few Irish people trying to arrange a transfer of their savings to banks outside Ireland which does not bode well for our future. Our present approach via NAMA etc. seems to be assuming that normality (pre 2008 economy) will magically return and all will be ok. We are deluding ourselves and we should face reality now or condemn our people to many years of falling incomes,high unemployment and economic stagnation. In the meantime NTMA has around 9 months of cash in hand to tide us over while we sort out the mess. Lets get real, make the hard decisions and start to live again with hope in the future. @Thomas Paine, “Do we have an alternative to the present “suspension of pain ” approach courtesy of the smoke and mirror off-balance sheet funding from the EU/ECB?” The answer, I’m afraid, is no. The institutional EU will do everything it possibly can to avoid Ireland triggering a default – and the current Government certainly won’t trigger one unilaterally. Yes, it would be better to take these losses on the chin, sort them and move on, but this would impose losses on not very robust EZ banks and on the savings pots of voters on core EZ countries – and this is a real no-no. It suits the Government and the institutional EU to push the debt mountain into the future. The Government will be gone in a year and a half – at the latest – and it’ll be someone else’s problem then. The institutional EU wants Eurozone economic growth to be stronger and more sustained until it will allow any drip-feeding of the huge losses that have been built up around the EZ – and not only in the periphery. Tom Paine “In terms of the government non-bank deficit we either default immediately or call in the EU/IMF to run the economy to push through massive cuts in public spending as well as tax increases” the correct version would be “we default immediately & push through massive cuts in public expenditure” or “call in the IMF….. We are running a primary deficit (ex banks of probably close on 10% of GDP. This must go to zero in a default =16bn of cuts or taxes in 1 year. Thomas Paine I hear you. The loan arranger is sadly correct, at the moment we have a stimulus of the deficit, an imbalance that is increasing as the economy falters. I see that getting worse. Blame the messenger! But accept it as a likelihood and adjust your lifestyle and business plans accordingly. What I worry about is what else is hidden and by whom. When corruption enters the picture, all trust dies and those who know what has happened may reap damagingly bad rewards for their extortion. From that point alone, the politicians on both sides should resign. They showed incompetence at best in the bubble years. What else have they done? Comments are closed.